The Brexit Brief: Is The Sky Falling?

It’s been only five business days since the UK voted to leave the European Union. In light of the loud and negative noise of the past week, EDR Insight is delivering this brief to bring you up to speed. The most significant impacts of the decision will obviously be felt in the UK, and to a lesser extent, in the EU, but the decision also has implications for the U.S. market. While it will take more than a week for the full impact of the Brexit vote to play out, below is what we know now about what it means to our market.

U.S. economy: Despite some short-term volatility, there seems to be little risk of driving our economy off track.

U.S. commercial real estate investment: A pause in commercial property investment activity this month is possible–not unlike reactions to other recent unexpected shocks to the market. It is worth noting that property due diligence markets tend to experience seasonal softness during the third quarter so the market may experience stronger-than-usual downward pressure on activity in July as the investment and capital markets adjust to the Brexit decision. Another outcome that could bode well for the property due diligence market is that foreign capital will likely shift attention from London to the relatively safe haven of U.S. markets, particularly the gateway cities. If this happens, it will good news for firms supporting transactions in metros like New York City, Boston, Chicago, San Francisco, Los Angeles and Washington, DC, cities that will be back in vogue as targets for the risk-averse.

Interest rates: Earlier this month, the Fed cited risks associated with the Brexit vote as a contributing factor in its decision not to raise rates. The prospects for a July increase have now been all but erased, and an increase may not happen until December. Continued low capital costs are good news for property investment.

Risk tolerance: Short-term uncertainty brought by the Brexit decision is likely to make investors more risk-averse in general. The same holds true for commercial real estate lenders.

CMBS: Any firms that support the CMBS market could see near-term issuance activity revert back to the slowness the market experienced back in February. Issuance could pick up again in the September-December timeframe before risk retention kicks in at year’s end.

Markets Detest Uncertainty

In the near term, the Brexit vote is likely to have a relatively modest impact on U.S. property due diligence markets. More significantly, it injects another layer of uncertainty onto an already nervous market. And markets detest uncertainty so it could be a rocky road in the second half of 2016. Negotiating the UK’s exit agreement from the EU is a complicated process that could take as long as two years. If other member nations follow the UK down the same path, then the impact on the global economy could be more widespread and damaging. In addition, the market shock brought by the Brexit vote coincides with the final stages of the U.S. Presidential election, which only adds to the political uncertainty facing global markets. As a result, investors may be more skittish than usual leading into the fourth quarter, potentially impacting corporate spending decisions, hiring and investment across the board.

One week after the decision, the “UK-sky-is-falling” headlines are already settling down, but the coming weeks and months could be a period of added volatility as the market adjusts. We will continue to carefully monitor any impacts on our markets and report updates to you as the next stage of the economic cycle materializes.